HLC Environmental Projects Ltd, Re [2013] EWHC 2876 (Ch)

Liquidators of HLC Environmental Projects Ltd sought relief against its principal director, Mr Carvalho, for misfeasance under s.212 Insolvency Act 1986. The director had caused the insolvent company to make substantial payments to a Portuguese parent company, to himself personally, to a bank, and to a third party, without proper consideration of creditors' interests. The court found multiple breaches of directors' duties.

Facts

HLC Environmental Projects Ltd was the UK holding company for a Portuguese group’s waste management interests. The company was involved in two PFI projects: the Neath Port Talbot MREC project and the Wrexham project. Both projects encountered significant difficulties, and the company became insolvent. The Respondent, Mr Carvalho, was the dominant director throughout. Between November 2005 and October 2008, during a period when the company was insolvent, Mr Carvalho caused the company to make payments totalling approximately £2.8 million to: Engenharia (the Portuguese parent company) of £697,063; himself personally of £507,000; NordLB (a bank whose loan was guaranteed by Engenharia) of £1,557,907; and Mr Ferro of £55,000. FRIE Grupo held a put option over shares which crystallised into an immediate liability of approximately £1.59 million upon exercise in October 2007.

The Payments in Question

The payments were made without consideration of the interests of the company’s creditors, including the substantial contingent (and later immediate) liability to FRIE Grupo. The Respondent effectively chose which creditors to pay while leaving others exposed to a real risk of non-payment.

Issues

The key legal issues were: (1) Whether the Respondent breached his duties as a director by causing the company to make these payments; (2) The extent to which directors must consider creditors’ interests when a company is insolvent or of doubtful solvency; (3) Whether the Respondent was entitled to relief under s.1157 Companies Act 2006; (4) The appropriate remedy for breach of fiduciary duty where payments discharged genuine company liabilities.

Judgment

Mr John Randall QC, sitting as a Deputy High Court Judge, found that the company was insolvent throughout the period in question under both the cash flow test (s.123(1)(e) IA86) and the balance sheet test (s.123(2) IA86). The Respondent breached his duties to consider the interests of creditors as paramount when the company was insolvent.

“where a company is insolvent the interests of the creditors intrude – in a practical sense it is their assets and not the shareholders’ assets that, though the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration”

The court held that where the duty to consider creditors arises, their interests must be considered as “paramount”. The court rejected the Respondent’s claim that he had overlooked FRIE Grupo’s interest, finding instead that he took the opportunity to pay creditors he wished to pay as and when money became available.

Application of the Objective Test

The court applied the objective test from Charterbridge, finding that an intelligent and honest man in the Respondent’s position could not reasonably have believed that making these payments was for the benefit of the company or its creditors as a whole.

Statutory Relief

The Respondent’s claim for relief under s.1157 CA06 failed because he could not establish that he had acted reasonably.

Implications

This case reinforces that directors of insolvent companies must prioritise creditors’ interests as paramount, not merely take them into account. The court can apply an objective test where directors fail to consider material factors. The case also demonstrates the application of the “West Mercia proviso” where payments in breach of duty discharged genuine company liabilities – the director must restore the funds but receives credit through the dividend mechanism. The judgment provides important guidance on the interaction between directors’ duties and insolvency, and on the evaluation of contingent liabilities in determining solvency.

Verdict: The Respondent was found liable for breaches of directors’ duties in respect of all four categories of payments. He was ordered to pay to the Company: £55,000 (Ferro Payments); £507,000 (Personal Payments); £1,557,907 (NordLB Payments, subject to a West Mercia proviso); and £697,063.21 (Engenharia Payments, subject to a modified West Mercia proviso). The claim for statutory relief under s.1157 CA06 was refused.

Source: HLC Environmental Projects Ltd, Re [2013] EWHC 2876 (Ch)